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Why Labour’s warning to pensioners is ‘pure scaremongering’

Pensioners
Pensioners

Pensioners vote. They turn up in great numbers at general elections, so politicians pay attention.

The power of retirees at the ballot box has sparked a fierce battle for the grey vote between the Conservatives and Labour.

Sir Keir Starmer’s party took the campaign to a new level over the weekend with full-page newspaper adverts accusing the Prime Minister of imperilling the state pension.

“Now Rishi Sunak, who broke the pension triple lock, wants to scrap National Insurance Contributions which help fund the state pension,” said the ad, which bore the signature of Liz Kendall, Labour’s shadow work and pensions secretary.

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“This would cost £46bn a year but he won’t say where that money is going to come from. This is a more dangerous unfunded fiscal black hole than Liz Truss’ mini budget, and it would put your pension in real jeopardy.”

It was a clear attempt by the opposition to divide the Tory Party from pensioners, a group that have traditionally voted for them in large numbers.

The message ignored the significant increases in the state pension delivered by the Government – just last month the payment went up by another 8.5pc – while stoking fears that the Conservatives will break the funding model for retirement benefits.

It played on the misconception that each worker’s National Insurance (NI) contributions ultimately fund their state pension when they retire.

This is not the case: National Insurance is a tax like any other, which goes into the Treasury’s coffers. It is used to fund government spending, including paying the state pension of today’s retirees but also many other forms of expenditure.

In reality, a cut to NI contributions has no more effect on the Government’s ability to pay the state pension than would a cut to any other tax.

Ros Altmann, a former pensions minister, labelled the adverts “pure scaremongering” by Labour.

“A lot of people think there is a fund that pays their state pension. There isn’t. It is not like a private pension, because there is no fund out of which the pension comes,” says the Conservative peer.

“It is all from taxpayers. It is a state benefit, not an invested pension that pays you the money from a fund that has been built up.

“When you pay NI, you pay towards today’s pensioners, not your own.”

The state pension takes up far more cash than is brought in by employee National Insurance, and so far has been protected and increased through thick and thin.

This can be seen by the events of this year. Jeremy Hunt, the Chancellor, cut employees’ National Insurance contributions by two percentage points in January and another two in April, yet the state pension went up last month regardless.

The triple lock, a promise to increase the state pension by the highest of inflation, average earnings or 2.5pc every year, has ensured that payments to retirees have risen noticeably faster than workers’ wages.

Yet the link with National Insurance remains in the minds of the public because of an administrative quirk. Each person builds up an entitlement to their state pension over time that is counted through years of NI contributions.

However, entitlement is not limited to paying National Insurance: parents receiving child benefit rack up allowances even if they are not working, for instance, as do participants in certain training courses, carers and a range of others with low or no incomes.

Another example of how NI and the state pension are not linked is the fact that workers keep paying the tax even after they have reached full entitlement.

People can claim a full state pension once they have paid 35 years’ worth of NI, yet workers below pension age continue paying the tax even when it no longer adds to their pension eligibility.

Steve Webb, formerly pensions minister in the Coalition Government and now at consultancy LCP, says: “It is all nonsense. If NI revenue, including employer NI, happens to be short, they can (and have on several occasions) top up from general taxation.”

Altmann notes the NI cash is also used for other benefits.

“National Insurance covers the NHS, sickness benefits, unemployment benefits – it is part of the welfare state.”

There are certainly reasons to worry that the state pension might become unaffordable. As the population ages and the cost of health and social care rises, increasing the state pension faster than workers’ wages will certainly strain public finances.

Long-term projections from the Office for Budget Responsibility (OBR) show that the expense of the state pension and other retirement benefits, such as housing support and the winter fuel payment, are on track to grow from just under 6pc of GDP last year to more than 10pc by the 2070s.

Analysts at the Adam Smith Institute estimate the triple lock will become unsustainable in the next 10 to 20 years.

Labour is right to point out that tax cuts are tough to implement at a time of enormous borrowing.

The Exchequer is still forecast to borrow more than £87bn this financial year, with the deficit falling only gradually to just below £40bn in 2028-29.

On current projections, the Government will only just hit its target of getting the national debt falling as a share of GDP in five years’ time. And even at the end of the period, the debt will still stand at a painfully high 94pc of GDP.

Scrapping National Insurance contributions for employees risks making it harder to balance the books and means more decisions are needed on restraining public spending.

However, it does not imperil pensions specifically.

Despite the cuts, taxes are on track to rise to their highest share of GDP since 1948, according to the Office for Budget Responsibility.

The Government is considering exempting pensioners from some of this. Sunak has raised the prospect of giving pensioners a higher tax-free allowance than workers, to make sure those receiving only the full state pension, without a private income, do not end up paying income tax.

Sunak’s latest promise to protect pensioners’ incomes with the “triple lock plus” suggests an extreme political determination to keep the old age benefit – regardless of Labour’s attack ads.